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Saturday, December 6, 2008

Chris Weber predicts a return to the Gold Standard

The following is Daily Wealth's latest advice on Gold. It start's with a scary question: "Will the government confiscate my gold?" and goes on to explain why it won't happen.

Will the Government Confiscate My Gold?By Chris Weber December 4, 2008

I get this question from time to time, and I suspect that it is something many people worry about.

After all, gold was confiscated back in the 1930s. Why couldn't it happen again? To answer this, we have to go back a few years to show how different things are now.

First, gold was money back then and had been money for thousands of years. In the U.S., that practice went back to the Constitution. The founders had lived through the ruinous paper money inflation of the American Revolution and were resolved that the printing of paper money unbacked by gold or silver would never happen again.

Now, fast forward to America's biggest economic crisis, the Great Depression. When it started, the U.S. was still on the gold standard. People could take their paper money to banks and convert it into gold coin or bars at the old price of $20.67 per ounce.

But this put a crimp on the government's ability to inflate. And the new president, Franklin Roosevelt, came into office believing that massive new paper money and credit creation was the way to get the country out of the depression.

So he believed that gold would have to be removed as money. On March 6, 1933, just two days after he came into office, he barred banks from paying gold to depositors. One month later, on April 5, he outlawed what he called "hoarding" of gold. All gold coins had to be taken to banks and exchanged for paper money, at the price of $20.67 per ounce, with two exceptions – each person was allowed to keep no more than $100 in gold coins, and rare coins were not included.

So now we come to the situation today. Gold is no longer regarded as money in any legal sense. Almost no one has even seen or held a gold coin, or certainly less than 5% of the population. Since 1933, money is whatever paper value either the market says it is or the government says it is. There is no more legal tie to gold.

This is a first in human history. Earlier suspensions of the link between gold and money were short and to be gotten over with as soon as possible. But when the world went off the gold standard in the 1930s, it never went back on. Needless to say, inflation has soared since then. The paper dollar has lost over 95% of its value.

Today, however, unlike 1933, there is no reason for the government to confiscate gold. Indeed, the government is even minting it and selling it. It can't sell gold fast enough, and there are shortages.

(If, for some crazy reason, the government decided to confiscate gold, I doubt many people would comply. The gold would go into hiding and trade in an underground economy, the way illegal drugs do today.)

Gold was confiscated in 1933 because everyone thought of it as money. They used gold as money, and this situation made it impossible for the government to inflate, because you can't print gold.

Now, nothing stands in the way of the government's ability to inflate. The central banks have been doing it at record rates during the last few weeks in order to avoid deflation.

But I think future inflation will so ravage the value of the U.S. dollar, as it did during the American Revolution and the Civil War, people will demand that once again the dollar be backed by gold.

In the world economy I see emerging today, income and cash are going to continue to be sought after. Short-term interest rates will eventually rise, giving your cash a better return. But particularly, you'll be happy to have your gold and precious metals.